As a consequence of the global financial crisis, New Zealand, together with other jurisdictions, has sought policy solutions to reduce the potential for systemic financial risk. One part of the proposed risk reduction strategy for the New Zealand financial system is the new Reserve Bank 'macro-prudential policy' (MPP) which builds on the existing prudential framework to further promote system stability. The objective of the MPP is to increase the resilience of the domestic financial system and counter instability in the domestic financial system arising from credit, asset price or liquidity shock. The Reserve Bank conducted public consultation on its MPP policy in March and April 2013.
A Memorandum of Understanding (MOU) was signed in May 2013 between the Governor of the Reserve Bank and the Minister of Finance, which formalizes the objectives, instruments and governance of the MPP framework.
In accordance with the MOU, any of the following MPP instruments could be potentially deployed by the Reserve Bank:
- Countercyclical capital buffer requirements (this would be an additional capital requirement imposed on banks by the Reserve Bank when "excess private sector credit growth is judged to be leading to a build-up of system-wide risk")
- Adjustments to the core funding ratio (this would vary the required proportion of "stable" funding for banks to fund a given amount of lending)
- Adjustments to sectoral capital requirements (this would require banks to increase the amount of capital they hold, relative to the nature and scale of their lending into specific sectors of the economy, eg agriculture and housing)
- Quantitative restrictions on the share of high loan-to-value ratio loans to the residential property sector.